Dollar takes breather after rally

After pushing up to its highest point in more than one month, the Australian dollar eased against the greenback on Tuesday, as concerns about the health of the US economy faded.

Before the local market opened, the Australian dollar had hit US90.88¢, lifted by a weakening US dollar after weaker-than-expected employment data spurred fears that the American economy was not yet out of the woods.

“As markets are sometimes inclined to do, they look at the trend in the economy over the last five minutes,” said Deutsche Bank chief economist Adam Boyton.

“I guess we’ve stopped responding to five minutes of payrolls and it’s now thinking about the next five months, and when the market did that, the US dollar found a bit of a base.”

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However, comments from US Federal Reserve officials highlighting that the central bank would not base its decision to taper its $US85 billion bond buying program by $US10 billion on just one month’s data, helped the US dollar to a modest gain against the Aussie.

The Australian dollar opened the local trading day at US90.54¢ and eased to US90.37¢ in late trade.

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“The market has now finished reacting to payrolls and people are probably coming to the view that the US economy isn’t materially weaker than we thought, it’s just that the data are choppier,” Mr Boyton said.

Also supporting the US dollar, was Treasury data showing the American government’s budget deficit was $US111 billion lower for the first quarter of the fiscal year, which began in October, when compared with the corresponding period a year earlier. It drop by more than one third to $US182 billion, according to the Congressional Budget office.

Improving budget figures from the US have been due to a recovering economy and higher tax collections. As the US economy continues to build momentum into 2014, the Australia dollar will likely weaken, Mr Boyton said.

“I think the Australian dollar is going to weaken against the US dollar and primarily that’s going to reflect tighter Fed policy in the US and also the improving budget position in the US,” he said.“I think we’ll end the year at about US85¢, but given the usual volatility in currency markets over the course of the year that means we’ll probably see everything from US95¢ to around US80¢, as far as our range is concerned,” Mr Boyton said.

With the Australian dollar to be trading around US85¢ towards the end of the year, the Reserve Bank of Australia is unlikely to make a move on interest rates, Mr Boyton said.

“I think the RBA is on hold for at least this year. An US85¢ Aussie dollar probably doesn’t change that picture,” Mr Boyton said.

“For the RBA, it’s not what the dollar is doing alone that matters, it’s what the dollar is doing, does it make sense given what’s happening in the global economy.”